Will China Have a Soft Landing?

Paul Gambles, Managing Partner of MBMG International, discussed the state of China's economy last month in a television interview with the Money Channel and on his blog.  He believes that there will be a hard or very hard landing.  A soft landing is not an option.  This is due to a number of factors:

• Lack of transparency in the economy - Chinese economic data is not reliable because of strong central government control of the data and economy.  The government determines where capital is invested, regardless of returns.  There may be bad investments that are priced incorrectly due to government stimulus and forced lending (which often turn into bad debts).  The GDP growth of 8.9% may not be real if the underlying loans are examined.  An example of government influenced pricing is when the Huijin Sovereign Wealth Fund bought controlling positions in the four largest banks:  Agricultural Bank of China, Bank of China, Industrial & Commercial Bank of China and China Construction Bank as a show of support in 2011.  Nobody knows what these banks are worth.
• Foreign Direct Investment is slowing in China.  It has become less attractive to investors and holding $1.5 trillion in US assets.  Exporting to Europe to diversify away from the dollar has become difficult due to the Eurozone crisis.  If the government had spent the US dollars, it would have increased inflation or the value of renminbi.  China was unwilling to accept either consequence and had to hold US assets.  China is repeating what Japan did thirty years earlier and both are similar to a currency hedge fund that is overexposed to the US dollar.
• China is predicted to become the world's largest economy by 2020.  A closed government and controlled economy will make it difficult to pass the US.
• Xi Jinping, the President-elect and successor to President Hu, did not get approved by the military.